The National Consumer Law Center (NCLC) provided a closer look into force-placed insurance, the risk for abuse associated with it, and what RESPA rights and considerations consumers should be aware of when they find their servicer implementing such policies.
Forced-place insurance, regulated by RESPA and its implementing statute, Regulation X, is a tool for mortgagees to protect their interest in a mortgaged property. This type of insurance is usually more expensive than standard policies and offers less protection than standard policies. The servicer has “total control” over the cost and selection of force-placed insurance, while the borrower foots the bill.
“Servicers have an incentive to select a policy in the servicer’s best interest, not the homeowner’s best interest,” NCLC stated. “For example, a servicer may choose an over-priced policy because that insurer offers financial incentives to the servicer, such as the insurer handling insurance monitoring of the servicer’s loans at a discount or no extra cost to the servicer. A servicer also might select a higher priced policy because it offers extra coverage or other services primarily benefiting the servicer.”
Force-placed insurance occurs for several reasons. Typically, a servicer will purchase a policy after a homeowner fails to purchase hazard insurance on their home, lets the coverage lapse, or purchases a policy not meeting the loan agreement’s minimum coverage standards. Occasionally, an error in servicing the loan’s escrow account may result in a servicer mistakenly installing force-placed insurance.
“While homeowners are faced with an insurance affordability crisis, mortgage investors are asking servicers to be tougher in force-placing insurance when the homeowner’s coverage is not adequate,” the report stated. “For example, effective June 1, 2024, a Fannie Mae bulletin and a Freddie Mac bulletin update their Servicing Guides to clarify that servicers must verify at least annually that the borrower’s insurer, policy amount, and type of coverage meet Fannie and Freddie standards.
“The bulletins advise servicers to force-place insurance when the servicer discovers that coverage is being canceled, non-renewed, reduced, or otherwise modified to no longer meet Fannie Mae and Freddie Mac requirements. While enforcement of these requirements has been suspended pending further review, servicers are still expected to comply at least until there are additional updates.”
NCLC explained these investor requirements specify the homeowner’s insurance must be based on replacement cost and not “actual cash value” – actual cash value policies reduce coverage based on the cost to repair after deducting for the property’s depreciation, and thus are less expensive. Nor can deductibles exceed 5 percent of the insurance coverage amount – another way to reduce the homeowner’s insurance’s cost. For example, a policy offering $99,000 in coverage cannot have a $5,000 deductible. Where the deductible is excessive or the policy is based on actual cash value, the bulletins tell the servicer to force-place alternative insurance even if this leads to duplicative coverage, the report stated.
When a borrower believes insurance has been force-placed on their mortgage by mistake, the NCLC stated the first step is to send a notice of error (NOE) that complies with RESPA’s requirements. Servicers are required to acknowledge receipt within five days, reasonably investigate the alleged error, and respond within 30 days, with the option to extend the period to 45 days. Notably, if the homeowner does not pay the disputed force-placed insurance charge during the investigation, the servicer cannot report the non-payment to a consumer reporting agency. Violations of RESPA’s NOE provisions are independent RESPA violations leading to private remedies.
The NCLC also suggested the homeowner supply proof of their own insurance when they send in the NOE and request the force-placed insurance be canceled, with any charges related to it removed from the account or fully refunded, if the homeowner was double-billed.
“RESPA and Reg X require any force-placed insurance charges or related fees paid by the borrower for overlapping insurance coverage, when both the force-placed insurance and borrower’s policies are in effect, to be refunded in full and removed from the borrower’s account,” NCLC stated.
“Even though the servicer has 15 days to cancel coverage after it receives proof that the homeowner has had adequate coverage, it must fully refund to the homeowner all charges related to the force-placed insurance, from the first day the insurance was force-placed.”
Servicers can also be hit with an additional RESPA violation by improperly managing the mortgagor’s escrow account, if that is what led to the lapse in the homeowner’s initial insurance policy and triggered a need for force-placed insurance.
“Servicers wrongfully force-place insurance often as a result of their own error in allowing the homeowner’s insurance policy to lapse by failing to make timely escrow disbursements,” the report stated. “This can have a devastating impact on homeowners by leaving them with limited coverage if there is a loss. Recently this has also meant that many homeowners have not been able to get replacement coverage where insurers have pulled out of markets affected by natural disasters or they have been forced to pay significantly higher rates than they had with their previous, lapsed policy.
“The homeowner’s actual damages can be substantial and are recoverable as injuries that directly flow from the servicer’s violation of 12 U.S.C. §2605(g). The homeowner should also send a NOE for the servicer’s errors in not complying with both the escrow account and force-placed insurance requirements.”